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Agriculture Marketing (Mkt165) chapter 7-mktg of agricultural commodities


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Agriculture Marketing (Mkt165) chapter 7-mktg of agricultural commodities

  1. 1. Mohd Zahid Laton, FPP UiTM Pahang CHAPTER 7 MARKETING OF AGRICULTURAL COMMODITIES1. Commodity exchanges. At commodity exchanges, buyers and sellers call orwire in their orders. Commodities are bought or sold in specified contract unitamounts for present or future delivery. Product quality must conform to tradingrules. Sales representatives on the trading floor match the buy and sell offers, ateither stipulated or bargained prices, to consummate sales.2. Centralized commodity exchanges. Centralized commodity futuresexchanges like the KLCE have a bid-and-offer floor auction of futures contracts.Floor traders for brokerage firms call out bids and offers to arrive at maximumobtainable trading prices. Trading occurs at a designated location on the exchangefloor called a trading pit. The KLCE acts as a middleman between the buyers and thesellers.3. Kuala Lumpur Commodities Exchange KLCE. The Malaysian commodityexchange for trading futures in crude palm oil, crude palm kernel oil, tin, rubber,and cocoa. The Kuala Lumpur Commodity Exchange (KLCE) is a futures exchangeset up in 1980 after the Malaysian Parliament passed a new legislation known as theCommodities Trading Act, 1980. It was subsequently restructured in 1985 after thedefault crisis in 1984. The rules and regulations of the KLCE are very similar tothose of other established futures exchanges in the world. The KLCE provides amarket-place for trading in several types of commodity futures contracts suchas the Crude Palm Oil (CPO) Futures, Tin Futures, Rubber (SMR20) Futures andCocoa Futures1. The CPO Futures trading is the only active futures contract tradingin the KLCE and in fact accounts for more than 90 per cent of its trading volume.4. The KLCE is the only futures exchange in the world that trades in CPOFutures. It is located in Kuala Lumpur, Malaysia, which is in Southeast Asia, the palmoil roducing region in the world. This region currently accounts for about 80 percent of global palm oil production and 70 per cent of exports.5. Definitions of term in commodities exchange: 5.1 Physical market. Physical market is a place where buying and selling of commodities and price of the commodities has been accepted and consulted between the parties. 5.2 Future market. Future market is a place where buying and selling a contract and price of the commodities has been consulted. 1
  2. 2. Mohd Zahid Laton, FPP UiTM Pahang 5.3 Commodity exchange. Commodity exchange specializes in the buying and selling of agricultural goods precious metals or foreign currencies. 5.4 Spot price. Price determination and delivering of the commodities are done immediately in the cash market. 5.5 Spot market. The purchase and sale of commodities for immediate delivery. 5.6 Future price. Todays price of the commodities to be delivered in the future market. 5.7 Future market. The purchase and sale of goods for delivery in the future. In the future market, speculative profits can be made from either rising or falling prices. 5.8 Bull market. Bulls are trader who feel prices will rise, so they ‘go long’ (buy). A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases capital gains. 5.9 Bear market. Bears feel prices will fall, so they ‘go short’ (sell). A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. 5.10 Future contract. Future contract is an agreement to delivered or received commodities at a specified time that has been accepted. Delivery of commodities only accepted when the contract matures. The price remains as accepted previously.6. Future contract promises can be fulfilled in either of two ways. Thecommodity can be delivered or accepted at contract maturity, or the promises canbe nullified by an offsetting futures market transaction prior to contract maturity.7. The future markets consists of traders and capable of buying and sellingfuture contracts for the public in future. It consists of a trading floor where buyingand selling for the future contracts of commodities. In this place, the buyers and thesellers will meet and exchange for contracts. The presence of governing bodies willenforce the guidelines of transaction and the clearing house is to ease transactionand transportation of the commodities.8. In the future market operation, delivering the commodities from seller to thebuyer transaction can be deal through; 2
  3. 3. Mohd Zahid Laton, FPP UiTM Pahang 8.1 F.O.B. (Free On Board). A shipping term which indicates that the supplier pays the shipping costs from the point of manufacture to a specified destination, at which point the buyer takes responsibility. It covers term of sale under which the price invoiced or quoted by a seller includes all charges up to placing the goods on board a ship at the port of departure specified by the buyer. Also called collect freight, freight collect, or freight forward. FOB includes tariff apply to product value as it leaves export country. 8.2 C.I.F. (Cost Insurance Freight). Term of sales signifying that the price invoiced or quoted by a seller includes insurance and all other charges up to the named port of destination. In comparison, carriage and insurance paid to (CIP) terms include insurance and all charges up to a named place in the country of destination (usually the buyer’s warehouse). CIF indicates that a quoted price includes the costs of the merchandise, transportation, and insurance. Cost, insurance, and freight is a phrase used in an offer or a contract for the sale of goods indicating that the quoted price includes the combined cost of the goods, insurance, and the freight to a named destination.9. Speculator/speculative middlemen. Speculative middlemen are those whobuy and sell product with the major purpose of profiting from price movement.Speculative middlemen seek out and specialize in taking these risks and usually do aminimum of handling and merchandising.10. Brokers. Brokers do not have physical control or ownership of the product.They follow the directions of buyers and sellers and have less influence in pricenegotiations than commission men.11. Factor contributing to the future market. 11.1 Lack of storage facilities. 11.2 Existence of legal contract. 11.3 Need of standard of grading. 11.4 Differing methods of payments. 11.5 Need of market information. 11.6 To guarantee the contract.12. Preconditions where commodities can be traded in exchange commodities; 12.1 Market is expandable. Product exported either locally or internationally is for the purposes of large scale production and to gain profit 3
  4. 4. Mohd Zahid Laton, FPP UiTM Pahang maximization. The commodities traded in the market is demanded by abroad countries. 12.2 Government control. Governnment control is a preconditions in order to monitored the efficiency of the trading of commodity either directly or indirectly. Government will set-up the policy, contract and law, and regulation of trading commodities. 12.3 Commodities can be graded. Grading of commodities will enhance the differing in prices. Once the grading is applied, quality control can be improved. Grading will influenced any buyers to freely choose their own products. 12.4 Involvement of traders. Involvements of processors, speculators and middlemen or buyers will influenced the presence of exchange commodities in the market. Whatever it is, it will abide on the policies, principles and regulations.13. Types of future market traders. There are two types of future markettraders; 13.1 Speculators. Speculators are traders who attempt to anticipate and profit from futures price movements. Speculators generally have neither the capability nor interest in fulfilling their futures contracts by taking or making delivery at contract maturity. 13.2 Hedgers. Hedgers also attempt to profit from anticipated price changes, but they usually can take or make delivery of the commodity at contract maturity. However, like speculators, hedgers seldom allow futures contracts to mature. There are always many more speculators than hedgers in the future market.14. Hedging and risk management. Price risk is inherent in the ownership andhandling of agricultural commodities. A hedge implies a protective mechanism. Afutures market hedge is such a risk management device. It involves the temporarysubstitution of a futures market transaction for a cash transaction. The mechanics ofa hedge consist of making opposite transactions on the cash and futures markets inorder to protect the firm against adverse cash price movement. 14.1 The hypothetical perfect hedge. The perfect hedge is a situation where the gain in one market exactly offsets the loss in the other. The process of hedging can be explained by the operations of the owner of a grain elevator. The owner buys cash grain from farmers and ships it to a terminal market for cash sale one week later. Owners of grain elevators normally operate on a small profit margin per bushel, and attempt to make their profits from handling charges rather than from speculative market positions. 4
  5. 5. Mohd Zahid Laton, FPP UiTM Pahang The elevator owner is long in the cash market when he originally purchases the grain from farmers. Until this grain is sold, the owner is exposed to a cash price risk because the price of grain could fall by the time it is sold one week later. To protect against this possibility, the owner could hedge as follows;Date Cashmarket Futures market BasisMarch 19 Buy 100,000 bushel Sell 100,000 bushel RM0.50 at RM2.00 (LONG) at RM2.50 (SHORT)March 25 Sell 100,000 bushel Buy 100,000 bushel RM0.50 at RM1.90 (SHORT) at RM2.40 (LONG)Gain or Loss Loss RM0.10 Gain RM0.10March 25 cash price = RM1.90+ Future gain = RM0.10Net value = RM2.00- original cash cost = RM2.00Profit or loss = RM0 14.2 The storage hedge. Businesses normally use the storage hedge when commodities are to be held for a period of time during which the basis is expected to narrow. This hedge purposes to protect the firm against adverse cash price movements, and to assist the firm in earning carrying charges (storage costs, interest, and insurance) during the storage period. The storage hedge can be used by farmers and food marketing firms.Date Cashmarket Futures market BasisNov 1 Buy corn at RM2.00 per Sell July corn contract RM0.50 bushel and store for next sale at RM2.50Jun 1 Sell corn at RM2.30 per bushel Buy July corn contract RM0.10 at RM2.40Gain or Loss +0.30 +0.10 -0.40Jun 1 cash price = RM2.30+ Future gain = RM0.10Net value = RM2.40- original cash cost = RM2.00Return to storage = RM0.40 5
  6. 6. Mohd Zahid Laton, FPP UiTM Pahang 14.3 The pre-harvest hedge. This hedge is appropriate for farmers during the period between planting and harvesting a crop. It allows farmers to lock- in a profitable selling price before or after the crop is planted and prior to harvest. ExpectedDate Cashmarket Futures market Nov basisMarch 1 Plant at estimated Nov cash Sell Dec futures RM0.40 Price of RM2.60 at RM3.00 per bushel (RM3.00 – 0.40)Nov 1 Harvest and sell locally Buy Dec futures RM0.40 at RM2.40 at RM2.80Gain or Loss +0.20Nov 1 cash price = RM2.40+ Future gain = RM0.20Net value = RM2.60Estimated cash price= RM2.60 6